Tax Preparation and Home ownership is one of the most rewarding experiences, but it comes with a lot of upfront costs. The IRS offers several tax breaks to make homeownership more affordable. To claim these deductions, you must itemize your deductions instead of taking the standard deduction. Mortgage interest and property tax are two common home-related deductions. Private mortgage insurance premiums could also save you money.
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Mortgage interest payments are https://www.getridoftaxes.com/how-should-i-prepare-documents-for-a-tax-preparation-service a significant portion of monthly homeowner payments. They can offer a tax break if you itemize your returns rather than take the standard deduction. This will result in fewer taxes overall. Unfortunately, homeowners must take the time and effort to claim this benefit in order to reap its full value. This benefit is not automatic. Homeowners must take the initiative to claim this deduction. It takes more work, but it will give you bigger tax breaks.
According to the IRS, mortgage interest is only deductible if it's paid on debt used to purchase, build, or substantially improve a primary or second home. This includes refinancing of debt secured by your primary or second home, as well as home equity loans or lines of credit for the same purpose. Only interest on debt related to improvements (like adding square feet or changing uses) meets certain criteria.
Mortgage points, upfront fees charged by lenders to reduce your interest rate and thus decrease monthly payments, may also be deducted as pre-paid interest and included on Schedule A as an itemized deduction. However, they must reduce your effective interest rate by at least 1% to qualify.
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One of the primary expenses associated with home ownership is paying property taxes to your local government. While these taxes may seem costly, they're tax deductible and can help offset some of the high cost of homeownership in certain regions. To take advantage of the deduction, homeowners must itemize and exceed their standard tax deduction.
Homeowners who itemize can also deduct state and local income, property and sales taxes. The combined limit is $10,000 ($5,000 for married filers filing separate returns) of state and local taxes. This does not include transfer taxes or homeowners associations fees, which are typically included in closing costs deductions.
If you use part of your home for business use, such as an office or studio, expenses related to that use could be tax-deductible. This deduction is available for single-family homes, townhouses apartments, condos, co-operative apartments and even mobile and manufactured houses!
Medically necessary home improvements such as wheelchair ramps or grab bars in bathrooms may qualify for tax deduction. You can also benefit from energy-efficient upgrades such as solar panels or windmills. However, to qualify for this deduction, you must have a letter from a physician certifying that the improvement is medically necessary.
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The IRS allows you to deduct certain expenses related to a home office. You can claim the deduction in two ways: regular or simplified. The amount of space in your home that is designated as an office will ultimately depend on whether or not it meets the requirements for a deduction (refer IRS Pub 587 Business Use of Your House for details).
To qualify for the home office deduction, an area in your home that is used exclusively and regularly to conduct your business or treat patients or clients must be designated as such. It could be any room, an area within a room or even an outlying structure such as a shed, garage or guest house - even an entire structure on your property!
For simpler calculations, you can use the simplified method. Just keep receipts of any furniture, appliances, or equipment specifically purchased for the office.
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When purchasing a home with a mortgage loan, the IRS allows you to deduct mortgage points you pay upon closing. Each point costs about one percent of the loan amount, and it reduces your interest rates by 0.25 percentage points. These deductions should typically be spread evenly over the loan term period; however, under certain conditions they can also be deducted all at once in one year.
To take advantage of the mortgage point deduction, it is best to itemize rather than taking the standard deduction. Your lender should send you an annual 1098 statement of mortgage interest detailing the amount of interest paid and any points paid. Box 6 of this document shows that figure. Property taxes paid out of escrow can also be deducted, provided that your municipality accepts this method of paying bills.
Home ownership also affords you additional tax breaks, such as energy-efficient credits and deductions for home equity loans used to make improvements on your house that meet certain criteria and standards. Improvements must meet specific and significant criteria to qualify. This could include making the house accessible for people with disability or grading it accordingly.
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